This is an audio transcript of the Behind the Money podcast episode: ‘Vanguard — can it keep playing disruptor?’
Michela Tindera
Naming your company can be a tricky proposition. Do you want to project strength or power or reliability? The FT’s US managing editor, Brooke Masters, says that back in the 1970s, a guy named Jack Bogle was facing this exact problem. He was trying to figure out what to name his mutual fund company, and eventually he decided to go with a nautical theme. Specifically, he named his firm after a British battleship from the Napoleonic wars.
Brooke Masters
Vanguard was Horatio Nelson’s flagship during the Battle of the Nile at the very end of the 18th century, and this is a very crucial battle in the Napoleonic wars, where the British Navy destroys the French Navy, at least temporarily, by using new tactics.
Michela Tindera
And just like that famous ship, Vanguard turned the tides — not of war, but of stock picking.
Brooke Masters
Vanguard fundamentally reshaped retail investing. The firm used new tactics that their competitors had never really encountered before — a little bit like Vanguard, the ship, during the Battle of the Nile.
Michela Tindera
Vanguard’s strategy forced their rivals in asset management to adapt. And ever since then . . .
Brooke Masters
It’s been cruising, just to put it bluntly. Vanguard is now the second-largest asset manager in the world. It runs the largest mutual fund in the world. This month, it also became the manager of the world’s largest exchange-traded fund, which is the hot new product. It’s basically enormously successful.
Michela Tindera
But recently, this massive ship brought aboard a new captain, and notably, he’s an outsider, poached from a competitor, which is a first in Vanguard’s history.
Brooke Masters
Vanguard has been steaming ahead, but now it has a new CEO who has ambitions to do the same thing to different parts of the financial services industry. So it’s, you know, it’s looking for new worlds to conquer.
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Michela Tindera
Now, these new worlds that Brooke is talking about are other pockets of the financial services industry. And the thing is . . .
Brooke Masters
If Vanguard is as successful in these new areas as it has been in the past, it could fundamentally disrupt financial services. I mean, they are basically an iceberg for the rest of the industry. And if they don’t succeed at what they’re doing, it could cause chaos for the rest of the industry.
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Michela Tindera
I’m Michela Tindera from the Financial Times. Today, on Behind the Money, Vanguard became one of the largest money managers in the world by following a philosophy that’s grounded the firm for decades. Now there’s plans to tackle some other areas of financial services, too. And a new CEO — an outsider — is tasked with leading the charge. But do they have to move beyond their old founder’s mantra in order to achieve their goals?
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Brooke, welcome to the show. It’s great to have you here.
Brooke Masters
Thanks for having me.
Michela Tindera
So this whole disruption that Vanguard achieved in asset management, it really begins with the firm’s founder, right, Jack Bogle. Tell me more about him.
Brooke Masters
He was a longtime investor, and he became obsessed with the idea of low cost — of finding ways to make it more affordable, particularly for small investors who can’t buy their way to cheaper fees, making it more affordable for them to invest in the markets.
Michela Tindera
Key point here — and you’re gonna hear this a lot going forward — Jack Bogle was all about keeping Vanguard’s costs low, low, low for their customers. I asked Brooke what kind of a name she might give this strategy.
Brooke Masters
I think you could think of it as cheap and cheerful.
Michela Tindera
So early on inside Vanguard, Bogle pulls off this cheap and cheerful strategy in two important ways. The first has to do with how the firm would invest clients’ money. At the time, the dominant style of investing was something called active management. That’s where stockpicking experts and researchers are pulling together baskets of securities that they think will perform well. And then charging you — the customer — higher fees to make all that happen. Bogle thought this was essentially nonsense.
Jack Bogle voice clip
Yeah, the fees in the mutual fund industry, I’m sorry to say, are generally pretty outrageous. I think the industry has got to adjust to a different era. The fees are too high and that’s all there is to that.
Michela Tindera
Bogle had a different plan.
Brooke Masters
He was a pioneer and a very important one of the idea of really cheap equity investing. The best way to do it is to not pay for experts. You just map what the markets do, it’s called index investing.
Michela Tindera
Index investing or passive investing pretty much just mimics a certain stock index like the S&P 500. That’s the 500 biggest publicly traded US companies by market cap. And so if the S&P 500 is up, you’re up.
Brooke Masters
It’s much, much cheaper because you don’t need anybody to do any research. You don’t have to think about what you’re buying. And so his whole view was like, how can we make it as cheap as possible for people to invest in the markets for the long term? If you don’t have access to some schnazzy money person and you don’t need white glove service, it’s great. It’s absolutely a fundamental way that a small investor can profit from the markets over the long term.
Michela Tindera
So there’s the passive investing piece of this. But remember I said there’s something else that Bogle does too — he also set up Vanguard with a very unique ownership structure.
Brooke Masters
Vanguard is pretty much the only big company where the ownership of the fund management company is actually the funds themselves, which sounds . . . it’s very circular, but basically what that means is there aren’t any outside shareholders. Like, BlackRock has outside shareholders. So if it has leftover money, it’s supposed to pay dividends or buy back shares and make life happy for its shareholders.
Michela Tindera
Like most companies that you think of.
Brooke Masters
And that’s just . . . That’s how modern stock investing works. Vanguard has this weird structure where there are no outside shareholders, there’s no founding family, there’s no partnership. Whatever money is left is supposed to go back to the people who also invest in the funds.
Michela Tindera
So what that means is any leftover money that would typically go to shareholders, instead, at Vanguard turns into even more cuts, pushing the firm’s fees lower and lower. Now these efforts — the passive investing and the ownership structure sent the industry spiralling.
Brooke Masters
It just squeezed the heck out of the industry. It forced everyone to think of ways to bring their costs down, and it really completely cut a swath through particularly active investment funds, but just the industry more broadly that it absolutely said like, you, investor, don’t have to be paying these fees. You can pay less and you can walk home with more money.
Michela Tindera
Yeah, I mean, the appeal is just kind of undeniable.
Brooke Masters
Absolutely. And it also . . . this is a period when Americans in particular are shifting to what are called 401k plans, which are retirement plans. So they are investing their long-term, their 30-year money, their 50-year money into the stock market and into the bond market. And so you really could see over time how much it matters. Like, over two or three years, it’s, you know, 2 per cent versus 3 per cent or 3 per cent versus 5 per cent. But you compound that, and we’re talking millions and millions of dollars and staggeringly better results.
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Michela Tindera
Now, Jack Bogle retired from Vanguard way back in the 1990s. But his cheap and cheerful strategy kept the firm sailing with the wind at its back for decades. Lately, though, the competitive landscape has changed.
Brooke Masters
I think the thing that’s happened in recent years is many, many other providers are also doing index funds and also doing cheap. So fees have come down dramatically, both for active and passive funds. And so Vanguard — while it remains the cheapest, pretty much — has found itself, you know, it’s less unusual. The other thing that’s happened is other companies, particularly upstarts and fintechs, have been offering new ways to trade and, you know, the whole meme stock phenomenon where lots of retail investors got excited about being able to trade shares. So there is another way for small investors to get involved in the market now.
Michela Tindera
What Brooke’s talking about here are companies like Robinhood and Betterment. They offer trading without the big fees. They have investment advice and they also have these sleek apps.
Brooke Masters
As a little investor, you buy derivatives, you buy wacky stuff and you can do it on your phone. Vanguard, meanwhile — with his little cheap and cheerful theory of the universe — so they didn’t offer all that, all the bells and whistles. They weren’t gonna give you confetti when you made a trade or any of that stuff. And so it’s not that they ever shrunk, they continue to grow dramatically, but they were losing out on some investors who wanted something different.
Michela Tindera
Now let me zero in here on the last thing that Brooke said — it’s important. Vanguard’s still cruising comfortably, being cheap and cheerful, but they are missing out on a whole new crop of investors, particularly young ones. And so Vanguard in recent years decided to lean into three new offerings to expand their reach.
Brooke Masters
About five years ago, they decided to make a push into active fixed income. That puts them into conflict with active bond managers who pick bonds rather than just following an index. They are also making a push into high-yield savings accounts, which puts them on a collision course with banks and wealth managers.
Michela Tindera
But Vanguard is pushing in another direction, too. And this could be the effort that shakes things up the most.
Brooke Masters
The third thing, which is perhaps the most revolutionary and the one that really is gonna cause all kinds of ructions, is they’re offering financial advice, with the idea . . . advice is how much of your money should you put in stocks versus bonds? You know, when should you shift the balance because you’re getting old and you can’t afford to lose things? These are really confusing issues, and lots of people want advice.
Advice, traditionally, has been something that only rich people get because it’s expensive to provide advice, Like, you know, some guy sitting and looking at my finances telling me, look, Brooke, you want a house in five years, so, therefore, you should do this with your money. That takes time and energy and they charge for it. And so what Vanguard’s trying to do is use, particularly computers, but also just their huge size, as always, to offer lower-cost advice to people who probably couldn’t afford to buy any advice elsewhere.
Michela Tindera
Vanguard wants to offer each of these things — the bond investing, the cash accounts, the investment advice for, you guessed it, cheap, cheap, cheap. That is their mantra, after all. And here’s the thing. They’ve got a new CEO who’s in charge of making those a reality. His name is Salim Ramji. I asked Brooke about him. What else should we know about him? You’ve interviewed him a couple of times now, right?
Brooke Masters
I’ve actually . . . I know him pretty well because he was a McKinsey consultant. And then he went to BlackRock. At BlackRock, he ran their index funds. So he is an expert in this sort of passive investing stuff. So what’s interesting is he is the first external CEO Vanguard has ever had. That’s a bit of a shocker, you know. And so there’s an interesting question, like where will he take them? They obviously felt they didn’t have what they needed internally. And so obviously they’re trying to do something different. You don’t bring in an outsider if everything’s perfect.
Michela Tindera
Yeah, that’s a big deal considering Vanguard’s never hired a CEO directly from an outside firm before. So then what’s Ramji’s plan to tackle this stuff?
Brooke Masters
I mean, Vanguard had already — under the previous CEO — started thinking about going into advice, it had actually done quite a bit. But he is out there spearheading it, telling the story to the world, pushing it. He brought in another outsider, interestingly, to run the financial advice stuff. Somebody who had been at Fidelity, which is one of Vanguard’s big, big rivals and way, way ahead on advice. They do a lot of advice. It’s kind of like, I mean, they were definitely working on it quietly. They’re now seriously full speed ahead, and they’ve got a guy who’s out there cheerleading but also leading it. I mean, he’s the guy who says, damn the torpedoes, full speed ahead.
Michela Tindera
OK, so Ramji’s pushing into these new areas — investment advice, but also the bonds and the cash accounts. So what challenges do you see ahead?
Brooke Masters
He’s an outsider. You know, there could easily be organ rejection. You know, Vanguard is proud of being different from everybody else. You know, they’re based in suburban Pennsylvania. They’re, you know, far from Wall Street. Lots and lots of people spend, if not their entire career, the vast bulk of their career at Vanguard. You know, if he is seen as pushing too far too fast or he’s seen as sort of too slick or not respectful enough of something that many of them have put their lives into. You know, he has to take the people with him. The people that they call crew — remember, going to Jack Bogle and his ship fascination — they’re called crew and the executives are called officers.
And so, you know, if they decide, you know, they could easily throw him overboard. Mutiny on the Vanguard. That’s the first big challenge, as he has to convince people that this is the right thing to do, and he’s the right person to lead it.
Michela Tindera
Yeah. So that’s the first thing. What, aside from that, is he gonna face?
Brooke Masters
The second huge challenge is much of what they want to do depends on having really good technology. Particularly the advice stuff, where the only way you can make advice affordable is through heavy use of AI and computers. And they have historically had terrible technology, like famously bad technology. Part of the cheap and cheerful was like, we don’t invest in this stuff and it was just dreadful.
Michela Tindera
Brooke, I’m curious, because here at the Financial Times, we have Vanguard as our retirement provider now. Actually, I started at the FT in 2022, and I thought that the platform, I thought was pretty snazzy, actually. But what’s your take on that?
Brooke Masters
I mean, I would say you’re lucky in that you arrived in the middle of a transformation. They started spending big money on technology about six years ago because they realised they had to do more. And they started spending 1bn a year back then, they now spend 3bn a year. And so they have been in the process of improving their technology. It wouldn’t surprise me that if you happen to hit the right pocket, that you got the good technology because they definitely are much better.
I have been using Vanguard for decades because my first 401k plan at my first employer was at Vanguard. And I will say it is radically different than it was when I started. I mean, one of my single most frustrating experiences with Vanguard was I had a 401k retirement plan from my old employer, which was at Vanguard, and I had a 401k retirement plan from the FT, which was also with Vanguard. And I wanted to combine them because if you put things together, they obviously, you cut your fees and it’s much easier to manage.
And so I called Vanguard and said like, can I just squash them together? And they said, well, yes you can. But the way you have to do that is you have to close your old account, we have to mail you the check, and then you have to mail it back to us in order to do it. And I was like, but you have my money. And they’re like, no, can’t do it any other way. And that was, I think three years ago, two and a half.
Michela Tindera
Wow.
Brooke Masters
I mean, that’s insane! Like I’m already depositing checks in my bank off of my phone, and Vanguard can’t combine two accounts? I mean, that’s outrageous.
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Michela Tindera
OK, so the new CEO has some obstacles that he has to figure out. He’s an outsider. They’ve got to improve their tech. Now I gotta make at least one more nautical reference here. But how does Ramji navigate all this? Which way does he steer the ship?
Brooke Masters
Well, I think the first thing he’s done since arriving last summer, was to really be respectful of Vanguard’s traditions and talk a lot about Jack Bogle and how much he respects him. And in one sort of telling gesture, when he redecorated his office, he thought back to Vanguard, the ship. He asked them to find the painting of the ship that had once hung in a prominent place, and they pulled it out of a basement, and he’s now got it hanging behind his desk in his office.
Michela Tindera
Yeah, that’s a big gesture.
Brooke Masters
That’s a big gesture. Like, it’s like, I respect this and I understand your heritage. And so I think that’s a big start. And he has to continue to do that kind of thing. He also has to hope that the woman he brought in from Fidelity to run the advice arm is similarly able to change the way they do advice and lead this big push without alienating people. I mean, she pushed through big changes at Fidelity but also lasted less than two years. So she is definitely a change agent and how well that goes, who knows.
On the tech side, I think they have been investing. And the real issue for them on the tech side, I think, is assuming that if it is as they claim that their technology really is much better, they have a perception problem more than anything. Because any website, anywhere has days. I mean, you know, the FT periodically doesn’t work. But because they have this reputation, any time it wobbles even a little bit, everyone’s like, oh look, it’s them again. And so stuff that they would completely tolerate from Walmart, they’re like, oh my god, Vanguard’s terrible tech. So that’s gonna be a matter of just proving that they can handle busy trading days, that they’ll be there, that it all works. And I think that takes time.
Michela Tindera
So if Vanguard, you know, succeeds and does manage to push forward on these three areas they’re trying to work on, how does that impact the rest of the investment industry?
Brooke Masters
I think it could be really scary for . . . particularly for the people who are known as wealth managers, who are the ones who give advice. Some asset managers have wealth management arms and give advice like Fidelity. But lots of places like private banks and you know, independent financial advisers who, you know, you go to them in their little office and they do stuff. If Vanguard’s actually out there offering a good product for a good price and frankly, Vanguard has a tremendous brand. I mean, people may get annoyed at their technology, but everybody believes they are doing their best, and what they offer is cheap and it’s in your interest.
So basically, if you’re willing to take all computer advice, no human beings, they’ll give you an advice for one-fifth as much money. And if you have at least $10,000, which isn’t very much considering most Americans have retirement money, they’ll do it for basically a third of what the pay for wealth managers are doing. I mean, they are coming in and seriously undercutting the industry. And if people are comfortable with that and decide that they want that, that could really upend the business models of all of these companies.
Michela Tindera
So what happens if Vanguard fails in any of these areas? I mean, does it have much to lose?
Brooke Masters
I mean, I think what Vanguard would say is everything they invest is money they could have given back to their investors. So I think they can easily cancel things and stop. But that’s, I mean, that’s an admission of failure. And when you’re owned by your investors, you don’t want to be wasting their money. So I think it’s embarrassing. Or do I think it will undermine Vanguard’s success? Probably not.
Michela Tindera
So as you mentioned, you know, for several decades, talking about Vanguard, their strategy has been cheap and cheerful, do you see that changing in the future? Do we give it a new name or is it more of the same?
Brooke Masters
I think it’s still cheap for sure, but they are trying to use things like AI and behavioural economics to nudge people into doing all this stuff, rather than just laying their wares out and saying come if you want. They are actively trying to push you. Cheap and clever is what they would like to be. I’m not sure they’re gonna get there, but I think their hope is to someday be both cheap and clever.
Michela Tindera
OK, so Vanguard led the charge for so long and they’re taking aim at new areas of financial services. I mean, what’s the lesson here, just don’t get complacent?
Brooke Masters
I mean, the investment industry has been, you know, spent many years being fat and happy. They made a lot of money, they made some money for their customers because customers don’t know what they’re doing. Compare the profit margins in financial advice to the profit margins in, say, supermarkets, where people understand what they’re buying. Vanguard’s lesson is just because you’re selling a complicated product does not mean you can take an unfair share of the take. And what they have said is what people were used to paying, they don’t have to pay any more. And that’s a big change.
Michela Tindera
And that’ll kind of continue as they move into these other areas to . . .
Brooke Masters
And they’re not the only ones. I mean, that’s the thing . . . I mean, Vanguard is big and famous and does this stuff but there are other cheaper alternatives. And I think that is pressing the advantage on that, that any part of the industry that has still got fabulous profit margins and is not having to compete for customers in the same way, should be on notice that you know, somebody is coming to get them.
Michela Tindera
Brooke, thanks for coming on the show.
Brooke Masters
Thanks for having me.
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Michela Tindera
Behind the Money is hosted by me, Michela Tindera. It’s produced by me, Saffeya Ahmed and Katya Kumkova. Sound design and mixing by Sam Giovinco, Joseph Salcedo and Breen Turner. Original music is by Hannis Brown. Topher Forhecz and Manuela Saragosa are our executive producers. Cheryl Brumley is the global head of audio. Thanks for listening. See you next week.
